By: Avi Gilburt

For the last year, I have been looking for what we classify as a wave (3) to strike the 2500SPX region. And, now, we are getting quite close.

Meanwhile, this rally has brought out two camps of market expectations at this juncture, both of which I believe are wearing blinders. We read about those who believe the markets basically have no limit to their upside, and are "virtually risk-free," and we read those who have "known" that the market will imminently crash during this entire 40% rally since February 2016.

Do you know who Goldilocks is?

Yes, the quote in the title of my article was actually posted by an "analyst" this past Friday. And it seems more and more are taking this view of the market. Why not? The market can't seem to pullback, so they must be right. Right?

I wrote this not too long ago, but allow me to refresh your memory:

As George Santayana wisely said, 'Those who do not remember the past are condemned to repeat it.' And, it seems that Ms. Yellen is forgetting her history.

One of the key factors in signaling a major market top is the expectation by the masses that one cannot happen. And, anyone that knows their history knows this to be true.

For those that know their stock market history, you would know that those 'in the know' were absolutely certain about the impossibility of a market crash right before the market crashed and lead us into the Great Depression. Let me show you a few examples:

'We will not have any more crashes in our time.'

This was said John Maynard Keynes in 1927, two years before the stock market crash which lead to the Great Depression.

'Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months.'

This was said on Oct. 17, 1929, a few weeks before the Great Crash, by Dr. Irving Fisher, Professor of Economics at Yale University. Dr. Fisher was one of the leading U.S. economists of his time.

'I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future.' -- E. H. H. Simmons, President, New York Stock Exchange, Jan. 12, 1928

And, these are just a few of the popular quotes of their day. And, by the way, has anyone heard of the Pierce Arrow Motor Car Company? You have not? Well, that is because they went bankrupt during the Great Depression. But, I digress.

In 10 years from now, we will likely be adding Janet Yellen to the list of those who lacked the foresight to see what history should have taught them. Yesterday, Fed Chair Janet Yellen said that the banking system is 'very much stronger' due to Fed supervision and higher capital levels. But, she then followed that up with what I believe will be her history-making statement. Yellen also predicted that because of the measures the Fed has taken, another financial crisis is unlikely 'in our lifetime.'

I am sorry to tell you this Ms. Yellen, but history's lesson will be learned the hard way by those who have failed to already learn from the past, as Mr. Santayana has warned. This time is not different.

So, this past week, I read how "markets are virtually risk-free." Does that sound like reasonable advice?

As in the case of the analyst quoted above, along with many of those quoted in the text of this article, when many begin to believe that the market simply cannot provide us with any sustained downside pricing, that is usually the point in time when the market proves otherwise. And, I believe we are on the cusp of the market beginning to prove that in the next few weeks.

Now, clearly, we have to temper my shorter term bearish expectations with all the perma-bears who continually have been calling for a market crash. So, this tells me I should be looking for a market top, but not a long-term market top. I guess we can call it our Goldilocks scenario. In fact, this has been my expectation as to what will occur once we hit our target for wave (3) for well over a year now.

While some are looking for the market to head much, much higher, and others are still looking for a crash, I am looking for the market to be topping out within the next few weeks, but this will not lead to a major top to the U.S. equity markets. Rather, this will only lead to a multi-month consolidation, which can take us back down towards the 2300SPX region. In fact, this is what we have been calling for since we bottomed back in February 2016, and the market has been playing out in an almost textbook fashion ever since.

My minimum downside expectation for this next pullback is the 2360SPX region, whereas my maximum downside expectation is in the 2285SPX region. Moreover, I would also expect that this correction will take a number of months, and can even take us into the Thanksgiving holiday until it completes, which would mean that it could take the shape of a triangle if it were to take that long.

But, as I have noted many times, the impending top I expect will only provide us a top to wave (3), with a wave (4) pullback to follow. That will set us up for wave (5), which can strike the 2611SPX region next, with the outside chance of seeing extensions even beyond that, as high as the 2800SPX region. We will have a much better idea of our target region when waves 1 and 2 of wave (5) have completed much later this year, or even in early 2018, depending upon how long wave (4) takes.

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